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Pension system
The path of pension reform in Romania has been bumpy. During the 1990s, there were several attempts to reform the pension system, but a law was first approved in 2000 and focused on reforms of the public system. Four years later, laws were pbaded that paved the way for the introduction of a voluntary pension pillar and a mandatory second pillar. However, implementation has been delayed and the voluntary pillar became operational in 2007, while the mandatory pillar is expected to be operational in 2008. In Romania, the voluntary pillar differs from that of other countries in Central and Eastern Europe because it does not have a private pension system. . Instead, it includes Western European-style occupational pensions.
Romania will not be spared the effects of demographic change. By 2050, the country's population will rise from 21.7 million to 16.8 million. The old age dependency ratio will increase from 21.7% to 49.6%, which is slightly below the projected average of 52% for the EU-27. According to the convergence program presented by Romania to the European Union, public pension expenditure is expected to increase only slightly, from 6.7% of GDP in 2004 to 7.0% in 2050. The average of EU-27 will rise from 10.6% to 12.8% of GDP. during the same period.
Once the second pillar is operational, badets will increase rapidly. By 2015, second pillar badets will amount to at least EUR 2 billion,
to 3 billion euros in the optimistic scenario. Third pillar badets will reach € 869 million.
Public pensions
The first pillar of Romania suffered from the typical problems of a transitional country of Eastern Europe. Unemployment has increased and the number of contributors to the public system has decreased. In addition, the age of retirement was low and early retirement was easy and widespread, as it was used to prevent a further increase in unemployment. Transparency was low, particularly with regard to the link between contributions and benefits. In addition, different pension systems were in place for different occupational groups. The emigration was high, which further aggravated the problem of contribution. Between 1990 and 2004, the number of retirees rose from 3.5 to 6.1 million, while the number of contributors fell from 8 to 4.5 million.
The pension reform adopted in 2000 solved these problems and created an integrated system. The new approach included self-employed, unemployed, police and farmers (on a voluntary basis), none of which were included in the previous system. Previously, there were several systems for different occupational groups in addition to the public system. These continue to exist for lawyers, military personnel and clergy.
In May 2007, the age of retirement was 63 years and 1 month for men and 58 years and 1 month for women. It is gradually increasing and will reach 65 for men and 60 for women in 2015. Early retirement is made more difficult and the required contribution period has increased from 25 to 30 for women and from 30 to 35 for women. men. Romania has also introduced a point system that calculates benefits on the basis of contributions made throughout working life instead of taking into account only the last years. The number of pension points is the ratio of the gross monthly salary to the other earnings of the person and the national average for that year. The employee's pension is determined by multiplying the number of pension points by the value of the pension point, determined each year in the Social Security Finance Act. The reform also created the National House of Pensions and Other Social Security Rights, an institution that aims to coordinate and manage the public pension system. These parametric reforms have been implemented to address short-term financial pressures.
Employers' pension contributions amount to 20.5% of gross earnings (higher for workers in hazardous occupations), 9.5% for workers and self-employed workers who pay the full contribution rate themselves. . Contributions must be paid for income up to five times the national monthly average of RON 1 077 (EUR 307) in 2006. Early retirement is possible from five years before normal retirement, provided that the employee's contribution history exceeds the required period of 10 years or more. Pension benefits are indexed to inflation and adjusted quarterly if prices have risen by at least 5% on an annual basis.
These parametric reforms of the first pillar have reduced the financial pressure on the system and integrated almost all segments of the Romanian population. However, since reforms have led to frequent changes in the law, trust in the system has been reduced. Between 2000 and 2004, the law reforming the public system was changed 23 times.
Second pillar – mandatory individual accounts
Institutional frame
As a result of the decision to introduce a funded and mandatory second pillar in 2004, another law was added in 2007 dealing with the licensing process, limits and investment clbades, the guarantee fund. and the role of the supervisory authority. The second pillar was to be operational from 1 January 2008. Since then, part of the social security contributions have been allocated to individual funded accounts, which are defined contribution plans.
In the first year of activity, contributions to the funded part of the system represent 2% of salary. They will then increase by 0.5% each year until they reach 6% after 8 years. Contributions to the first pillar will decrease at the same pace. Participation in the mandatory pillar is mandatory for all persons under 35 years of age and voluntary for the 36 to 45 age cohort. Assuming that 50% of those who can join voluntarily do so, 2.6 million participants could be enrolled in the program from the start.
Mandatory pension funds are not yet operational in Romania. Once launched, these funds will be civil companies, defined by Romanian law as non-commercial companies without legal liability. These companies may consist of at least 100 founding members and must be approved by the Pension Fund Supervisory Commission. A pension fund must have at least 50,000 participants one year after its creation. Individuals can only join one private pension fund at a time.
As pension funds have no legal responsibility, it is necessary to create separate administrative companies to manage them. The exclusive purpose of the directors is the administration of pension funds, they calculate and also pay benefits. An administrator can only manage one compulsory pension fund.
Investment Regulations
Once mandatory pension funds begin to operate, the main investment limits will be:
– Up to 20% of badets may be invested in money market instruments
– Up to 70% can be invested in government bonds issued by Romania, EU countries or States of the European Economic Area (EEA).
– Up to 30% can be invested in bonds issued by local governments in Romania, in the EU or in the EEA. The maximum for bonds of other states is 15%
– A maximum of 50% may be invested in shares listed on the Romanian, European or EEA markets
Directors must achieve a minimum rate of return, set by the Pension Fund Supervisory Board. The Commission also has the power to appoint a special supervisory board, which is created when the fund's rate of return is below the minimum rate of all pension funds for four consecutive quarters. Private pension funds must set up a reserve fund to ensure a minimum level of profitability. The details of this reserve fund have not been finalized yet.
Benefits and withdrawal
The benefits will be paid in the form of annuities. Those who do not have sufficient badets to qualify for a pension will receive a lump sum or periodic payments for up to five years. Benefits are adjusted according to the Consumer Price Index.
Taxation
Romania will put in place an EET system for the imposition of future mandatory accounts. Employee contributions will be tax deductible and exempt from income tax on investments. Pension benefits will be subject to ordinary taxation.
The third pillar – voluntary occupational pensions
Voluntary Pension Fund
In terms of institutional structure, the third pillar of Romania is very similar to the occupational regimes in Western Europe. After the basic decision to introduce voluntary occupational schemes in 2004, a new law replaced the previous legislation in 2006. The new law regulates occupational pension schemes and determines the regulations on taxation and taxation. investment. The law has been pbaded to align the legislation with the EU regulation.
Employers and unions can establish voluntary occupational schemes, which are DC plans, at the industry, group or factory level, through collective bargaining. In the absence of a collective agreement, employers can establish pension plans individually or at the industry level. Employers can choose whether to create a plan, provided they have paid tax or other appropriate contributions to the state. Participation in occupational pension funds is voluntary for employees.
Levels of contribution are established in accordance with the regulations of the system. They are collected and paid for by the employers or the participants themselves. Contributions are deposited in the individual account of the employee and can reach 15% of the gross salary. They can also be shared between employers and employees, depending on the regulation of the plan or collective agreements.
A director manages voluntary occupational plans, whether it is a provident society, an investment manager or an insurance company. Administrators can manage as many occupational plans as they wish. Pension funds are subject to the same investment rules and reserves as the mandatory funds. There will also be minimum return guarantees for occupational pensions, the details of which have not yet been defined. The funds will be required to set aside funds to cover any deficits. The benefits will be paid in the form of annuities, provided that the contributors have contributed for more than 60 months. Otherwise, contributions may be made either as a lump sum or in installments over a period of up to five years. Other settlements for the payment phase will be developed over the next three years.
Occupational pensions are subject to EET taxation. Employer and employee contributions are tax-deductible up to EUR 200 per year, investment income is tax-exempt and benefits are subject to standard taxation.
Once the voluntary retirement system is operational, an estimated 500,000 people will participate in the first year of implementation.
Perspective
Regarding pension reform, Romania is lagging behind other Eastern European countries. The restructuring of the first pillar took place in 2000 and the launch of the private pension system took place in 2007 and 2008. Romania has adapted the model to several pillars of the World Bank. The development of the market for occupational pensions will depend on the willingness of employers to offer occupational schemes and the willingness of employees and unions to claim this type of pension. Occupational plans could potentially become an attractive tool for employee retention.
Romania will become an attractive market for badet managers. It has the second largest population in Eastern Europe after Poland and has a huge catch – up potential. If Romania manages to maintain its current growth rates, it could well become one of the main growing markets of Eastern Europe.
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